What you will learn
This lesson dissects the two numbers that appear on the bourse board more than any others: earnings per share (EPS) and the price-to-earnings ratio (P/E). You will learn where each comes from, how it is calculated, what it tells you and, more importantly, what it does not tell you. By the end you will understand why a low P/E in Iran's inflationary economy is not necessarily a sign of a bargain.
Definitions
Earnings per share (EPS): each single share's slice of the company's net profit over a financial period. Divide net profit by the total number of shares and you get EPS. In Iran it is usually quoted in rials per share.
Dividend per share (DPS): the portion of EPS that the company, at its general assembly (مجمع, majma), decides to pay out in cash to shareholders. EPS is the total profit earned; DPS is only the distributed slice of it. Do not confuse the two.
Price-to-earnings ratio (P/E): the current share price divided by earnings per share. It says how many units of price the market is willing to pay for each one unit of the company's annual earnings.
Adjustment (تعدیل, taadil): a revision of an earnings estimate. When fresh data lifts the expected profit it is a "positive adjustment"; when it lowers it, a "negative adjustment."
The mechanism: how these two numbers are built
Step one is EPS. The formula is simple:
EPS = net profit for the period / number of shares
Step two is P/E, which rides on top of EPS:
P/E = current share price / EPS
The key question is which EPS goes in the denominator. There are two common cases:
1) Trailing P/E (TTM): this uses the actual, realized profit of the past twelve months (Trailing Twelve Months). It is the figure shown live on each ticker's trading board. Its basis is the settled past, not a guess.
2) Forward P/E: here the analyst estimates the coming year's EPS from sales, the exchange rate, inflation and raw-material costs, then divides the current price by that estimate. Because future profit is a guess, two analysts can produce two different forward P/E figures for the same ticker.
Reading a P/E is straightforward: if, assuming steady profit, the P/E is 10, an investor is paying ten times one year's earnings; put another way, if all profit were paid out and held steady, the principal would return in about ten years. A higher P/E means the market expects more profit growth or sees less risk; a lower P/E, the opposite.
A worked example
Suppose (these figures are entirely hypothetical, for teaching) that Company A earned 1,000 billion tomans in net profit over the past twelve months and has 5 billion shares.
- EPS = 1,000 billion tomans / 5 billion shares = 200 tomans (equal to 2,000 rials) per share.
- If the current share price is 2,400 tomans, then trailing P/E = 2,400 / 200 = 12.
So the market pays 12 tomans for each toman of Company A's annual profit. Now suppose an interim report reveals that sales beat expectations and the analyst raises this year's profit estimate; if the price stays flat and the estimated EPS rises to 300 tomans, forward P/E falls to 2,400 / 300 = 8. That is exactly the effect of a "positive adjustment" on the ratio: with higher profit and a flat price, the stock looks cheaper.
In Iran's market
On the Tehran Stock Exchange, the financial statements and reports from which EPS is drawn are published officially on the Codal system (codal.ir), and each ticker's trailing P/E is shown on the trading platform.
One important change is worth knowing. Until December 2017, companies were required to publish an "earnings-per-share forecast," and the EPS shown on the board was that forecast figure. Through a directive effective 30 December 2017 (9 Dey 1396), the Securities and Exchange Organization scrapped the mandatory profit forecast; instead, companies now file a "management interpretive report," and EPS is reported on the basis of actual trailing-twelve-month (TTM) performance. That is also why the meaning of "adjustment" shifted: today it refers more to an analyst revising an estimate, or to realized profit changing in interim reports, than to the revision of a company's official forecast.
Alongside the ticker's own P/E, two other numbers on the board are useful: the sector P/E (the industry average) and the market P/E (the whole bourse). Comparing a company's P/E to its sector average is far more meaningful than comparing it to a company in an entirely different industry.
Common mistakes
"A low P/E means the stock is cheap." Not necessarily. Sometimes the P/E is low because the market expects profit to fall in future, or because past profit was one-off and not repeatable. A low P/E can be an opportunity or a warning; the number alone does not say which.
Comparing P/E across unrelated industries. A fast-growing tech firm and a mature cement producer naturally carry different P/E levels. The correct comparison is within the same sector.
Ignoring capital increases. When a company multiplies its share count through a capital increase, the old EPS is no longer directly comparable to the new one; the denominator of the formula has changed. Comparing EPS across two periods without accounting for the change in share count is misleading.
The limits of P/E under high inflation
This point is vital for Iran's market. Under high inflation, companies' nominal (rial) profit is inflated along with rising prices; trailing EPS grows, and as a result the P/E looks small and "cheap." But part of that profit merely reflects inflation, not real growth in output or sales. Profit that comes from asset revaluation or exchange-rate swings lacks the durability of operating profit and may not repeat next year. On top of that, when the risk-free rate (such as the bank deposit rate) is high, an investor rationally accepts a lower P/E, because the low-risk alternative offers a good return. So in an inflationary economy, read P/E alongside the quality and durability of profit, the bank rate and inflation, never on its own.
Summary
EPS tells you how much profit each share earned, and P/E tells you how much the market pays for that profit. The trailing version (TTM) rests on settled fact; the forward version rests on an estimate. "Adjustment" means revising that estimate. And today's most important lesson: in Iran's inflationary economy, never read the P/E number alone; place it next to profit durability, the company's sector and the bank deposit rate. For a refresher on how the market's headline indices are built, see our previous lesson, TEDPIX vs the Equal-Weight Index. You can also follow the live P/E of tickers and the Tehran Stock Exchange overall index, and for a practical example of the "adjustment" concept read our report on Karbon, and for how a capital increase reshapes EPS, our piece on Bank Mellat's EPS. The full lesson series lives at Sahmino Academy.
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